Dear,
In the last few days there has been a significant drop in the value of the main cryptocurrencies.
In my opinion, with some volatility that will make the prices go up and down, this is an unavoidable long-term trend.
Blockchain promises great advantages but also disadvantages, and most of the current cryptocurrency use cases do not seem to come close to addressing them in a satisfactory way.
The basic rule of thumb for determining the sustainability of a service is that the value it provides outweighs the cost it entails.
Do the current and proposed use cases of the current cryptocurrencies fulfill this rule?
Let's look at its use as a payment system; Using bitcoins as a payment tool means acquiring bitcoins (buying or mining). But if we look at the volatility of the currency, the risk of having losses before executing the payment is very high.
On the other hand, confirming a transaction on the blockchain requires the time and computational effort of the consensus mechanism. For example, confirming a payment in bitcoin takes approximately 10 minutes.
Is this a realistic alternative to using centralized payment methods such as paypal, mastercard or visa?
There are alternatives like Lightning Network which significantly improves the time required to register a transaction but it also has other limitations. For instance; as it is based in bidirectional payment channels between two nodes, there is a possibility of fraud if one of the nodes drops the channel. For fixing this, designers have included the concept of Watchtower, which requires additional computational effort.
In any case, we should not confuse a decentralized technology with a decentralized market. A decentralized market has mechanisms that favor the balance of trading power of economic agents. Currently, the main cryptocurrency exchange platform is bigger than all the others combined, it is a clear example of centralization of market trading power.
I admit that there are other business cases, more complex than a simple-payment transaction where blockchain potentially could add more value, let's look at one of them.
In a mortgage loan, the cash-flow structure can be complex and also includes the relationship with a real estate collateral. In this case, both the value of the transaction and its complexity could justify the computational effort and response time of the blockchain.
What advantages does blockchain have compared to the current model?
With blockchain, the two counterparties have the guarantee that no one will modify the record of what has been agreed.
But it does not improve in any way the solvency analysis of the debtor, the accurate valuation of the collateral, or any of the elements that represent a risk for the creditor. Nor am I able to imagine the relevant advantages for the debtor in using blockchain, but I invite you to propose some in the area of responses to this article.
Some experts have proposed that blockchain meant the deployment of peer to peer lending, as something very disruptive in which blockchain has a lot to contribute.
Peer to Peer lending does not mean that one person lends directly to another, due to the difficulty in matching maturities, amounts and risk. Peer to Peer lending means that multiple people combine their investments to finance the needs of others, similar to the securitization of the loans of a bank.
The fundamental problem in this process is transparency. Currently, the valuations of the loans are based on obsolete technologies, with a very limited capacity of tracking the value of loans and the remuneration of investors.
These processes are supported by legacy technologies, developed individually in each bank, without a comprehensive vision of the processes. Developing these processes on blockchain technology, does not guarantee the integration of processes or the transparency of the information.
On the other hand, SAP Banking has been developed on an integrated architecture, which has been SAP's value proposition in all its products for 50 years. This value proposition assures transparency and reconciliation which is the basis of Capital Optimization.
This transparency is also the driver to match accurately the capital requirements of the borrowers and the investment opportunities of the lenders in Peer to Peer lending, or any other business case.
The challenge is how to migrate the current processes of traditional banks to the integrated systems of SAP Banking. We've been trying for years, but the complexity of business processes, the size, and the technology of traditional banks make it difficult. There have been some successes but less than we all would like, so the transformation of the financial system is still pending.
An alternative are some neobanks built 100% in SAP technology. These neobanks are capable of redesigning and automating processes, and they also enjoy the integration and traceability provided by SAP banking, giving them a significant competitive advantage.
Additionally, these neobanks can notarize transactions in a distributed ledger like blockchain achieving some level of decentralization.
But the final step in the evolution is a system built in SAP Banking technology capable of evaluating the capital requirements and investment opportunities of its Business Partners, proposing proactively financial instruments for covering them, and with a price adjusted to the risk of transaction.
Of course, the transactions, quotations, prices, amounts, capital consumed, etc can be registered in a blockchain.
We are working on presenting our system to the market, and looking for business partners and investors, if you are interested do not hesitate in contacting me at ferran.frances@capitency.com
Looking forward to reading your opinions.
Kindest Regards,
Ferran Frances.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
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